Study: Eagle Ford producers hurt most by crude export ban

1of3A tug boat pushes a barge for oil in the shipping channel past a military transport ship at the Port Corpus Christi. Without market constraints, oils from Eagle Ford and Bakken shales typically would attract higher, premium prices, said study author Ken Medlock, head of Rice University's Baker Institute for Public Policy. Instead, he said, the opposite is happening. He added that the steepest discounts are happening in the Eagle Ford.Photo: Express-News file photo

2of3Oil companies argue the long-standing export restrictions have fostered a persistent discount for domestic oil. But some refiners, including San Antonio’s Valero Energy Corp., are fighting to preserve the status quo that allows exports of gasoline, diesel and other petroleum products while blocking foreign sales of raw, unprocessed crude.Photo: Express-News file photo

3of3Tugs push an oil barge out of the Port Corpus Christi. “We don’t see a big seismic shift from lifting the ban,” says Skip York, an oil analyst with the research firm Wood Mackenzie.Photo: Express-News file photo

WASHINGTON — The United States' longstanding ban on crude exports is benefiting a handful of domestic refiners, at the expense of all U.S. oil producers, according to a new study from Rice University.

The economic analysis, released Wednesday, finds that the pain is especially acute for companies pulling high-quality ultralight oil out of the Eagle Ford Shale in Texas.

The study marks a departure from previous analyses that have predicted exports would lift the price for domestic West Texas Intermediate oil, which on Wednesday closed at a $7.27-per-barrel discount to the international benchmark, Brent crude. Although it comes to a similar conclusion — suggesting domestic oil production would climb, along with the prices for U.S. crude — the Rice study looks beyond West Texas Intermediate and is built by calculating the potential benefits for an array of crudes based on their quality and consistency.

The oil surging out of wells in Eagle Ford and in North Dakota's Bakken formation today is lighter and sweeter — with less sulfur — than Brent or WTI. Without market constraints, those oils typically would attract higher, premium prices, said study author Ken Medlock, head of Rice University's Baker Institute for Public Policy. Instead, he said, the opposite is happening because the 40-year-old export ban “already presents a binding constraint on the domestic market.”

“If the ban were lifted, it would immediately allow the sale of domestic crude oils into the international market, where prices reflect differences in crude quality and therefore would be higher for the light crude oils being produced from shale plays,” Medlock said. He stressed that unlocking oil exports also would incentivize investment in pipelines and other midstream infrastructure to move crude to the coast.

The current policy, created in the aftermath of the OPEC oil embargo, blocks exports of most raw, unprocessed crudes but does not limit foreign sales of gasoline, diesel and other petroleum products.

Some U.S. refiners have been able to capitalize on the domestic oil discount — running cheaper, light domestic oil through their facilities and then selling gasoline into a world market that tracks the cost of Brent crude.

But the Rice University study highlights that those benefits do not extend equally to the refining sector. Only “a small subset” of refiners are benefiting from discounted light, sweet crude, Medlock told reporters in a news conference Wednesday.

That's because refiners broadly have already replaced any imported light crude with domestic supplies, so any growth in U.S. production — under the export ban — will target the next available market: refiners of medium crudes.

These refiners have a choice: buy domestically produced light crude or imported medium crude. As the Rice paper explains, since these refiners already have made investments to handle medium crudes, they generally would seek to optimize their existing configurations and purchase lower-cost medium crudes in the international market.

But they can be enticed by domestic producers of light oil who have no other option to sell their crude and face either shutting in production or discounting their price to be competitive “at the margin defined by the medium crudes.”

Without a change in oil export policy, Medlock says refiners would expand to handle more light, sweet crude. But, he noted, as long as there is political pressure to undo the ban — and uncertainty about what might happen — refiners will be reluctant to fund those changes, lest a later policy change strand their investments.

If the crude export ban were dismantled, Medlock predicts no additional refining investments would be needed, and excess domestic light oil would be exported, without affecting U.S. imports of medium and heavy crudes.

Although oil producers' campaign for exports is aimed at capturing higher world prices for their crudes, trade restrictions aren't their only obstacle. Bottlenecks in the nation's energy infrastructure — including strained or lacking pipelines to ferry crude across the country — and the costs of that transportation combine to lower the netback price, or profit, that oil producers get for their crude.

Medlock's study attempts to calculate the potential price for dozens of crudes on the open market, in the absence of trade barriers. It focuses on the price possible for these oils if they could get to the water and the open market. It does not factor in the transportation costs of getting it there.

Other analysts and oil producers are moving beyond a focus on the gap between Brent and WTI prices as they examine the export ban.

A new Wood Mackenzie analysis notes that light sweet U.S. oil isn't equally attractive around the globe. For instance, in Europe, there would be a limited appetite for it, amid competing production in the North Sea and Mediterranean regions.

Skip York, vice president of integrated energy for Wood Mackenzie, said it's important to talk substantively about the potential destinations and types of U.S. oil that might be exported. “These details are critical to reaching better policy decisions in the nation's interests,” York said.